What is Superannuation Benefit in India and How to calculate it?

What is Superannuation Benefit in India and how to calculate itWhat is Superannuation Benefit in India and How to calculate it?

When we think of retirement benefits, Employees Provident Fund (EPF) Public Provident Fund (PPF), Gratuity and National Pension Scheme (NPS) are the few things that strike our mind. Very few people know that there is another benefit plan existing known as the superannuation benefit. In order to plan your retirement in a better way, it is very important to know your superannuation benefits. It is an organizational pension program created by a company for the benefit of its employees. In other words, it is referred to as a company pension plan. What is Superannuation Benefit all about? Who is eligible to get Superannuation Benefit? How does Superannuation scheme work exactly? What are various income tax benefits available in Superannuation?

Also Read: Best Largecap Mutual Funds to invest in India

What is Superannuation Benefit in India?

Today, most companies offer a superannuation benefit. Superannuation is a kind of retirement benefit that is offered to you by your employer. Your employer makes a contribution every year on your behalf towards the group superannuation policy held by the employer. Usually, the companies take Superannuation Plans from any of the approved insurance companies like LIC or ICICI approved insurance companies and contributes therein. The returns of the superannuation fund may differ according to the company providing the annuation insurance.

The employees who have been contributing to the superannuation scheme of their company during their employment; at the time of retirement or resignation have the option of buying a superannuation-linked pension from any insurance company.

What are various types of Superannuation Benefit?

There are two types of superannuation benefits:

1) Defined benefit plans

The benefits to be received at the retirement are already known to the employee and it is fixed on the basis of their rank service and final salary. So, the risk of generating such benefits is entirely on the employer.

2) Defined contribution plans

These schemes are better to manage as the employee and employer directly correlate it with the contributions made. The scheme defines the contribution of both and leaves the outcome to the market forces. Most of the plans existing today are defined contribution plans. Here, the risk factor is attached to the employee, as he is not aware of the amount he is going to receive at the time of retirement. 

How does Superannuation scheme work exactly?

The companies open the superannuation benefit fund with any of the approved agencies like ICICI, LIC etc. Employer needs to contribute to maximum of 15% of the salary to superannuation funds on behalf of the employee. The companies are making this part of the salary structure itself i.e. part of CTC. There is no specific contribution from employees like it is for EPF. Upon retirement or resignation from his job, his employer to either withdraw his entire superannuation fund or choose the annuity option and gives the employee.

How is Superannuation Benefit calculated?

The superannuation fund is calculated on the basis of following points:

1) Less than 1 year of service – NIL.

2) 1 to 2 years of service – 50% of contribution + interest received from fund.

3) 2 to 3 years of service – 75% of contribution + interest received from fund.

4) 3+ years of service-100% of contribution + interest received from fund.

The above table reveals that if the employee wants to benefit himself from the superannuation fund, he needs to be associated with the company for more than 3 years. Then only, the employer would contribute to 100% of the amount allocated for superannuation. If he works for less than 3 years, he would not be benefited though it is a part of CTC structure.

What happens to Superannuation scheme if employee resign from a company?

If an employee resigns from a company and moves to another company, he can transfer his superannuation fund to the new company if the new company is having approved superannuation fund. In case, new company does not provide this facility, the employee can withdraw the amount with necessary taxes applicable or retain the amount in the fund till the retirement.          

What are various income tax benefits available in Superannuation?

For the purpose of taxation, there are two types of superannuation. One is approved and the other is not approved. This approval is taken from the IT Department. The approved fund means that the fund has been approved by the Commissioner in accordance with the set rules. The employee needs to ask his/her employer about the category of the fund.  

From the employee’s point of view, here are the tax benefits:

1) Employee contribution (possible in the case of defined contribution and not defined benefit) for an approved superannuation fund is eligible for deduction u/s 80C, subject to the limit set in Section 80CCE. 

2) Benefits payable on death or injury are tax-exempted.

3) Pension or annuity will be treated as salary income and taxed accordingly.

4) At the time of change of job, any amount withdrawn is taxable under the head ‘income form other sources’.

5) Interest from a superannuation fund is tax-free.

6) On retirement, 1/3 of the commuted fund is fully exempt from tax and the remaining amount if transferred to an annuity is tax-free and if the amount is withdrawn, it is taxable in the hands of the employee. 

From the employer’s point of view

1) The contribution of employer to the fund is allowed as expenditure deduction for business u/s 36(1)(iv) subject to certain limits of the Income Tax Act 1962.

2) Income received by the trustees on behalf of an approved superannuation fund is exempt u/s 10(25)(III).       

What happens to your Superannuation scheme when you reach retirement age?

Once the retirement age is attained, the employee has two options-

Option 1 – To withdraw 1/3 of the accumulated fund and the remaining 2/3 be converted into the pension.

Option 2 – To buy the pension product for the entire amount without withdrawing anything. Such commutation is tax-free for an employee.

For instance – X retires with a superannuation fund of Rs 15 lakh. Then, he may withdraw Rs. 5 lakh from it (1/3 of Rs. 15 lakh). It is totally tax-exempt. The remaining Rs. 10 lakh is fully taxable if he withdraws and if he buys annuity from this amount, it is tax-exempt. He can use the entire amount of Rs. 15 lakh for buying annuities. 

Also Read: How to check if you are eligible for Gratuity from your company?

What are various annuity options available in Superannuation?

At the time of retirement, post-retirement annuities can be bought from any life insurance Company. The most common options available to the employee are –

  • Payable for life
  • Payable for life guaranteed for 5 years or 10 years or 15 years
  • Payable for life with a return of capital
  • Payable jointly on the life of husband and wife

Conclusion: Superannuation scheme is an excellent for the working class of India to make their retirement more financially stable. The employees are much more secured with these schemes. Another benefit from such schemes is that the employee is prompted to be associated with an organization for a longer term as such schemes provide more benefits to them rather than switching jobs more frequently.  

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What is Superannuation Benefit and How to calculate it



    Hi Suresh

    What is the use of posting our queries when you are not replying anyone.

  • shanthi

    Mr. Suresh
    Will I be able to get the benefits from the amount accumulated so far, if I resign from the organization.

    I heard that the employees contribution will be only given to the employee if he/she resigns. is it true?

  • L.Ravichandran

    I have 28 lakhs accumulated in Superannuation fund with LIC.
    I propose to withdraw 1/3 on retirement by Sep 2020.
    Then what amount of pension I will get on following options.

    1.Payable for life
    2.Payable for life guaranteed for 10 years.
    3.Payable for life with a return of capital
    4.Payable jointly on the life of husband and wife.
    5.If I withdraw the remaining 2/3 and invest will it earn more than the tax amount plus the pension that we would get.
    6. What is IT% if I withdraw balance 2/3 also at time of retirement or after 2 years of retirement.

  • ashok

    Great article and two things i would like to know.
    1.During redemption during retirement can one withdraw the whole amount without annuity.
    If you can provide me a download link it would be good to send to my like minded friends and also since internet sometimes link goes off and we have to again log in to read it.
    Also we can then read it offline when we have time and also show it to our friends.
    Appreciate your looking into the same.

  • sivaraman VK

    Great Article sir. My Organization is associated with LIC. But have clarificcation on below:

    1. Came to know from LIC Rep that only 1/3rd can be withdrawn and remaining should be compulsorily put on Annuity scheme. (not told option of complete withdrawal)

    2. Will employer contribute equal amount of corpus at the time of retirement? (For ex if my accumulated corpus is 5 Lak and at the time of separation will employer contribute something on this?

    Request guidance.

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